The JOBS act would allow start-up companies to go directly to investors on the internet with little or no regulation or disclosure. This gives individuals the ability to raise money with almost no strings attached and without regulations, it leaves the door open to many to fall victim to investment scams and frauds.

Does unfettered crowd funding and initial public stock offerings open the door to investment fraud? In the immortal words of philosopher Sarah Palin, “you betcha.”

While it sounds like one of those online innovations that may make capital available to a larger number of people, crowd funding could make the boiler room scams of the 1980s look like mere parking violations.

This new concept, which would allow start-up companies to go directly to investors on the internet with little or no regulation or disclosure, is contained in the JOBS Act working its way through Congress. There are also changes to Regulation A and D in securities laws that would imperil investors. Most of the worst language is in the House version of the bill.

Regulators, understandably, abhor the idea of deregulating this process.

Does anyone remember mortgage security derivatives and credit-default swaps? They were virtual licenses to print money for Wall Street. Yet those products had some regulation and oversight and authorities still missed one of the biggest scams of all time when it all melted down in 2007-2008, socked American taxpayers with a multi-trillion dollar bill and vaporized some 10 million jobs.

Now comes the opportunity to raise money with almost no strings attached. A casino-like money bazaar would enter cyberspace, but no watchdogs would be around to sniff out these deals.

How bad is this legislation? Let me count the ways, starting with state securities regulators as represented by the North American Securities Administrators Association (NASAA). This is from Jack Herstein, president of NASAA, on the House vote to approve the JOBS act:

“While well intentioned, the JOBS Act approved by the House sacrifices essential investor protections without offering any prospects for meaningful, sustainable job growth. NASAA urges the Senate to craft legislation that balances economic growth with the protections that promote the necessary confidence investors must have in financial markets to sustain an economic climate that encourages job creation.

“State securities regulators are acutely aware of today’s difficult economic environment, and its effects on job growth. Small businesses are important to job growth and to improving the economy. However, by placing unnecessary limits on the ability of state securities regulators to protect retail investors from the risks associated with smaller, speculative investments, Congress risks enacting policies that, although intended to strengthen the economy, will likely have precisely the opposite effect.”

Here are two former SEC officials:

“It won’t create jobs, but it will simplify fraud. This would be better known as the Bucket-shop and Penny-stock Fraud Reauthorization Act of 2012,”

according to Lynn E. Turner, former SEC chief accountant quoted by Bloomberg, March 13.

“The bill is a disgrace,” said Arthur Levitt, former chairman, U.S. Securities and Exchange Commission, quoted by the San Francisco Chronicle, March 11.

A legislative alert from the AFL-CIO from March 8:

“While the proponents of this bill claim it will promote jobs and economic growth, it would actually have the perverse effect of raising the cost of capital for all companies, by increasing the risk of fraud, and reducing the flow of information to investors. Experience shows that weakened securities regulations increase the danger of fraud and speculation. . . . In sum, the JOBS Act will weaken investor confidence in our capital markets by creating new and expanded loopholes in our securities laws.”

The New York Times editorial from March 10:

Another provision would permit “crowd funding” — raising money from small investors through the Internet — without requiring those companies to provide meaningful disclosure and without adequate oversight by the Securities and Exchange Commission. John Coffee Jr., a securities law expert at the Columbia University School of Law, has dubbed that ?the Boiler Room Legalization Act.’”

And finally, the Consumer Federation of America, which boils down the major flaws of the House bill (and some in the Senate version, which is somewhat stronger in its investor protection language):

“Without any evidence of a problem that needs solving, the House JOBS Act would eliminate the ban on public solicitation in private offerings under Regulation D. An estimated $900 million was raised through Reg D offerings in 2010 alone, and more than 37,000 such offerings were reported to the SEC in 2009 and 2010 with a median value of $1 million.

At the same time, state securities regulators have documented a troubling rise in fraud in this market since state oversight authority was preempted in the mid-1990s. Removing the ban on general solicitation would not only make a mockery of the concept of a private offering on which the Reg D exemption is based, it would also create an opportunity for fraud on a mass scale.

Regulation A is intended to allow issuers to raise small amounts of money (currently up to $5 million) from the public under a simplified, streamlined process. Both the House JOBS Act and Senate companion legislation, S. 1544, would dramatically increase the ceiling for Regulation A offerings to $50 million. The Senate bill includes additional investor protections absent from the House bill, including requirements for up-front disclosure, periodic reporting, audited financial statements, Securities and Exchange Commission (SEC) oversight, and a negligence-based litigation remedy. These provisions, which seek to balance increased access to capital with appropriate investor protections, must be retained in any final bill.”

Normally, I’m an advocate for alternative sources of capital formation. Wall Street and the banks have made a shambles of this process. There’s too much cronyism and often the biggest deals are designed to make investment bankers rich at the expense of investors. Just look at how shares of an initial public offering are doled out: the insiders get the spoils at a great price.

So what’s so wrong with allowing internet operations to raise money?

The internet has become this bastion of anonymity. Who’s raising the money? Where is it going? Is there any auditing required? Are the audits made public? Who’s overseeing the auditors? I’m assuming none of this apparatus is in place in this proposed crowd funding provision, or if it is, it’s much weaker than what we have now.

As it stands now, there are far too many private-placement deals that have gone sour — even with extensive regulation. Once you know you can file securities offering away from the scrutiny of regulators, that’s an invitation for chicanery.

Of course, some regulation is better than none, and even scams like the Madoff and Stanford frauds are missed when human beings don’t take whistleblowers seriously and look the other way.

The JOBS bill, however, breaks down the walls of any semblance of vigilance. It may be called innovation and may give many entrepreneurs access to cash, but some safeguards need to be in place. Congress is not on the right page yet and far too many investors will get fleeced unless somebody’s watching the door of these online bankers.